Walter Hutchens’ Blog

Tuesday I had lunch with Stephen Hsu, dean of the School of American and Comparative Law at the China University of Political Science and Law. We got to know each other back in 1998 when we were both summer associates at the same law firm. After law school, we both worked at the firm for a couple of years before coming out as academics. Like many people with academic proclivities, firm life was not for us.

We met at All the Sages Bookstore (万圣书园, Wan Sheng Shu Yuan) near the Qinghua and Beijing University campuses. First time I’d been there. A nice little bookstore. There’s an adjoining cafe, called the Thinker’s Cafe. Nice ambiance, though the “mocha” I ordered was not very good. Actually I didn’t think in the “Thinker’s Cafe.” I napped, dozing on a big overstuffed sofa. I saw another person dozing, too. Given the brutally hot weather Beijing has had lately, mid afternoon in a dark, comfortable place with ample AC created the Sleeper’s Cafe.

Then I wandered down the street (Cheng Fu Lu), finding an internet cafe. Last time I went into an internet cafe in Haidian, it was a spartan affair–concrete floors and old computers with text-based email programs. Not so today. There were rows and rows of flat-panel displays, with a boot-up program asking you if you’d like to proceed in English or Chinese (or Korean I think–there were lots of Korean students in the place, the young men playing shoot ‘em up video games and many of the young women sending email and “chatting” online (or so it seemed from my glances at their screens–God knows what all those squiggles mean). Of note, the per HOUR charge ranges, depending on the time of day, from one to six yuan–so from 12 to 70 cents per hour, basically. I have been in business centers in hotels in Beijing that have the audacity to charge nearly US 20 dollars per hour! It’s nice to see the affordable internet cafes open in Beijing again. They were closed for a long period, following a tragic fire in one cafe that killed a number of students.

Yesterday I learned that Barry Naughton has agreed to be the discussant for a panel a group of us are proposing for the next conference of the Association of Asian Studies. The participants are Mary Cooper, Stephen Green, Scott Kennedy and myself. I am excited about the panel. I’ve never been to an AAS conference before, though I joined the organization once I knew I would be leaving the firm to become a professor. For my AAS “debut”, this panel would put me in “high cotton” as we say in Alabama. It will be great fun to discuss PRC financial reforms with this group.

My other bit of good news yesterday was that I got an email from the articles editor of the Penn Journal of International Economic Law, confirming their offer on my article on PRC private securities litigation and suggesting it might be possible to get it out as soon as September. That would be sweet. I am very content with this as a placement for my first article. It is a very respectable journal, a good “foundation” for my future academic publishing. In fact, besides being a top-ranked law school, a bonus is that because Wharton is always at the very top of the lists of best business schools, I will probably get some positive spill-over effect in terms of impressing my business school colleagues (who eventually vote on my tenure).

In the “bizarre news” department, The NY Times reports today that a government plan to launch a platform for trading terrorism futures has been scrapped.

Huh? was my first reaction. The more one thinks about it, the more it sounds like a joke. But evidently this proposal was not a joke. Trading in “terrorism futures” was about to commence. However, the plug has been pulled.

The political backlash is understandable. This is a bad soundbite: “Your government is developing a system in which participants can earn money by correctly foreseeing that the president will be assassinated or that some unspeakable horror will befall you the citizens.”

But I see the rational basis of the idea. It’s essentially an application of the efficient capital markets hypothesis to information concerning terrorism. A terrorism futures “market” might efficiently gather and assimilate information to dynamically “price” various risks. Obviously, the people directing the “war on terrorism” need to understand the dynamic probabilities of various risks.

But operationalizing this sounds impossible. Who are the potential traders? Aren’t they already doing everything they can to assess risks? Surely this idea wasn’t designed to create incentives to fight terrorism! Survival seems compelling enough, without any economic mediation. Also, how would these traders get information to seek competitive advantage? If they obtained some useful information, shouldn’t they call the Pentagon rather than logging a “day trade” in terrorism futures? Also, existing problems in securities markets such as insider trading, market manipulation, irrational behavior and imperfect information could afflict this hypothetical market in terrorism futures. As the Times story noted, a terrorists might seek to manipulate the “market” to disguise their real plans. In any case, it seems the shock value of the idea is largely what did it in, not operational challenges or potential downsides.

. . . I suppose no matter how awful “trading” in terrorism futures sounds, the worse reality is that insurers and military strategists–and ultimately all of us, whether we want to “invest” or not–are playing this game “for real.”